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NO.  94-82304 


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Author: 


Dixon,  Frank  Haigh 


Title: 


Railroads  in  their 
corporate  relations 

Place: 

[Cambridge] 

Date: 

[1 908] 


.^M-ii ^OW  -  '^v 


COLUMBIA  UNIVERSITY  LIBRARIES 
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MASTER   NEGATIVE   # 


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Dixon,  Frank  Haigh,  1860- 

Railroads  in  their  corporate  relations,  by  Frank  H.  Dixon. 
Reprinted  from  the  Quarterly  journal  of  economics,  vol.  xxni, 
November,  1908.    fCambridge,  Mass.,  1908j 

cover-title,  p.  i34j-65.    23"". 


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-U.  S.— Intercorporate  relations.    2^olding  companies. 


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BIBLIOGRAPHIC  IRREGULARITIES 

MAIN  ENTRY:    Dixon.  Frank  Haiqh 


Railroads  in  their  corporate  relations 


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RAILROADS  IN  THEIR  CORPORATE 

RELATIONS 


BY 


FRANK   H.  DIXON 


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reprinted  from 

The  Quarterly  Jcurwa?.  of  Economics 

Vol.  XXIII.,  November,'  I'gng 


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9    m    •     A  MA  JCf    •    •    • 

QUARTERLY  JOURNAL   OF  ECONOMICS 

Published  for  Harvard  University 

Is  established  for  the  advancement  of  knowledge  by  the  full  and  free  discussion 
of  economic  questions.     The  editors  assume  no  responsibility  for  the  views  of 
contributors^  beyond  a  guarantee  that  they  have  a  good  claim  to  the  attention  of 
well-informed  readers. 

Communications  for  the  editors  should  be  addressed  to  the  Quarterly  fournal 
of  Economics^  Cambridge,  Mass.;  business  communications  and  subscriptions 
($j.oo  a  year),  to  Geo.  H.  Ellis  Co.,  2^2  Congress  Street ^  Boston,  Mass. 


CONTENTS   FOR  AUGUST,  1908. 

I.  SUBSTITUTES  FOR  CASH  IN  THE  PANIC  OF  1907           ...  A.  Piatt  Andrew 

II.    ON  THE  NATURE  OF  CAPITAL Thorstein  Veblen 

III.  THE  STREET  RAILWAY  SETTLEMENT  IN  CLEVELAND     .        .  E.  W.  Bemis 

IV.  AUSTRALIAN   ECONOMIC   PROBLEMS.    II.  THE  TARIFF        .  Victor  S.  Clark 
V.    THE  NATIONAL  GOLD  BANKS G.  D.  Hancock 

VI,    COMPETITIVE  AND  MONOPOLISTIC  PRICE-MAKING      .  .    Harry  G.  Brown 

NOTES  AND  MEMORANDA: 

The  Massachusetts  Anti-Stock- Watering  Law Grosvenor  Calkins 

Professor  Carver's  Concept  of  an  Economic  Quantity  George  Ray  Wicker 

RECENT  PUBLICATIONS  UPON  ECONOMICS. 
APPENDIX  :  The  Currency  Legislation  of  1908. 

CONTENTS  FOR  NOVEMBER,  1908. 

I.  THE  STATISTICAL  COMPLEMENT  OF  PURE  ECONOMICS  Henry  L.  Moore 

n.  RAILROADS  IN  THEIR  CORPORATE  RELATIONS         .  Frank  H.  Dixon 

III.  A  STATISTICAL  SURVEY  OF  ITALIAN  EMIGRATION  .  .     R.  F.  Foerster 

IV.  ON  THE  NATURE  OF  CAPITAL :   INVESTMENT,  INTANGIBLE 

ASSETS,  AND  THE  PECUNIARY  MAGNATE  ....       Thorstein  Veblen 

V.    TWO    EXPERIMENTS    IN    PUBLIC    OWNERSHIP    OF    STEAM 

RAILROADS p.  w.  Powell 

REVIEWS  AND  SURVEYS : 

Davenport's  Value  and  pjstributio^  ' ,       * T.N.  Carver 

The  Civic  Federat-oh  Report- on  ^ly^ic' ownership W.  B.  Munro 


•  • 


*< 


NOTES  AND  MEMCRANDA: 

'  ■  »      ' 

Sex  Ratios  at  B^rth  ir  Town  ind  Qo^nti^y  '  . 
The  Aufjtr.^lian  I'arltf :  ,A  Si^pplemeiftary  Note 
The  Cleveland  Rrferenduin  on  Street' Railways 


W.  Z.  Ripley 

Victor  S.  Clark 

E.  W.  Bemis 


a   • 
»      * 


i 


STATISTICAL  COMPLEMENT  OF  PURE  ECONOMICS     33 

ticularlv   Professor  Clark,   Professor   Marshall  and    Pro- 
fessor  Pareto. 

When  we  turn  to  the  department  of  dynamic  economics, 
we  find  that  only  two  problems  are  receiving  adequate 
treatment.  These  problems  are  the  theory  of  population 
and  the  theory  of  crises.  The  manner  in  which  the  theory 
of  crises  is  taking  on  a  scientific  form  has  already  been 
described.  That  the  theory  of  population  has  in  recent 
years  made  tremendous  strides  toward  perfection  is 
common  knowledge.  The  correlation  with  economic 
factors  of  changes  in  population  due  to  changes  in  birth- 
rates, marriage-rates  and  death-rates,  has  been  exten- 
sively investigated  and  exactly  described.  The  change 
in  the  quality  of  the  population,  together  with  the  causes 
of  the  change,  is  being  properly  investigated  in  the  work 
of  the  school  of  eugenics.  These  two  departments  of 
dynamic  economics,  the  theory  of  population  and  the 
theory  of  crises,  which  alone  among  dynamic  problems 
are  assuming  an  approximately  satisfactory  scientific 
form,  and  which  should  therefore  serve  as  models  for 
the  development  of  other  departments,  owe  their  present 
scientific  forwardness  to  the  utiUzation  of  recent  statistical 
methods  in  the  treatment  of  questions  which  had  re- 
mained in  the  realm  of  pure  theory. 

If  it  is  allowable  to  base  an  inference  upon  the  opinion 
of  masters  of  the  science  and  upon  the  record  of  accom- 
pUshed  results,  it  is  not  unreasonable  to  say  that  at  the 
point  which  economics  has  now  reached  further  fecund 
scientific  ideas  and  abiding  practical  results  are  to  be 
found  in  the  development  of  the  Statistical  Complement 
of  Pure  Economics. 

Henry  L.  Moore. 
Columbia  University. 


i 


• « 


wm 


f 

> 


INTENTIONAL  SECOND  EXPOSURE 


\ 


1%  ^ 


.  .  .  77/^  .  .  . 

QUARTERLY  JOURNAL    OF  ECONOMICS 

Published  for  Harvard  University 

Is  established  for  the  advancement  of  knowledge  by  the  full  and  free  discussion 
of  economic  questions.      The  editors  assume  no  responsibility  for  the  -vie^s  of 

contr'butors,  beyond  a  guarantee  that  they  have  a  good  claim  to  the  attention  of 
well-informed  readers.  "^ 

Communications  for  the  editors  should  he  addressed  to  the  Quarterly  fournal 
ofEconomus,  Cambrid^e^  Mass.;  business  communications  and  subscriptions 
{$300  a  year),  to  Geo.  H.  Ellis  Co.,  272  Congress  Street,  Boston,  Mass. 

CONTENTS   FOR  AUGUST,   1908. 


I.     SUBSTITUTES  FOR  CASH   IN   THE   PANIC   OF   1907 
II.     ON   THE   NATURE  OF  CAPITAL 

III.  THE  STREET  RAILWAY  SETTLEMENT  IN   CLEVELAND 

IV.  AUSTRALIAN   ECONOMIC   PROBLEMS.     IL  THE  TARIFF 
V.     THE  NATIONAL  GOLD   BANKS 

VI.     COMPETITIVE  AND  MONOPOLISTIC  PRICE-MAKING      '. 

NOTES  AND  MEMORANDA: 

The  Massachusetts  Anti-Stock- Watering  Law 
Professor  Carver's  Concept  of  an  Economic  Quantity       ' 

RECENT   PUBLICATIONS   UPON   ECONOMICS. 

APPENDIX  :   The  Currency  Legislation  of  1908. 


A,  Piatt  Andrew 

Thorstein  Veblen 

E.  W.  Bemis 

Victor  S.  Clark 

G.  D.  Hancock 

Harry  G.  Brown 

Grosvenor  Calkins 
George  Ray  Wicker 


CONTENTS   FOR  NOVEMBER,  1908. 

I.     THE  STATISTICAL  COMPLEMENT  OF  PURE  ECONOMICS 
IL     RAILROADS  IN  THEIR  CORt  ORATE  RELATIONS 
III.    A  STATISTICAL  SURVEY  OF  ITALIAN  EMIGRATION 

'''•     ^^^^^'i^^^.J^A'^U^EO^  CAPITAL:    INVESTMENT.  INTANGIBLE 
ASSETS,  AND  THE  PECUNIARY  MAGNATE 

V.     TWO    EXPERIMENTS    IN    PUBLIC    OWNERSHIP    OF    STEAM 
RAILROADS »>ic«m 

REVIEWS  AND  SURVEYS: 

Davenport's  Value  and  .Djstwbuiio^' %  '    *"  .         .         . 

The  Civic  Federat'ora  Report",  on  ^iSJ^iV  ownership 
NOTES  AND  MfiMCRAFDA:       "    ***        .     «   •      '. 
Sex  Ratios  at  B^irth  ir  'lowu  ^cf  Qowntjy     ' 
The  AuSjtrAliaii  tarlfT:  ;A  S^ppleinerftary  Note 
The  CleA^tiandRHerendum' on  Street  Raifways 


Henry  L.  Moore 

Frank  H.  Dixon 

R.  F.  Foerster 

Thorstein  Veblen 

F.  W.  Powell 


T.  N.  Carver 
W.  B,  Munro 


W.  Z.  Ripley 

Victor  S.  Clark 

E.  W^.  Bemia 


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^\  ^i^'ii  ^vr  liirn  M)  I  lie  (Icpai'i  nii'iii  ((iMyiianii-'  rroiif  .liiic-, 
^\'*'    ''^'1    iiial    only   I  wo   prohlcins   aiv   ivccixiiiir  a^loouaie 
1  i"<';^ni!('!ii .     'llic<c  jirohlciiis  ai'c  tlic  tlicoi'\-  oi"  pMiiuJai  i.  ,n 
'i^i'i  5l^*'  ilnorv  (^f  vv\>v>.     The  inaiinc]-  in  which  ih.-  ■:io..]\- 
"^   'Ti-i'-   i-^   lai-.in^  on  a  scicntihc  toi-m   ha^  ahvaox-   Imm  n 
(Ic-crihoiL     Th;tl   the  th(H)ry  of   j;0})u!alion    ha-    in   ivcrnt 
}-t'ai-<    mafic    1  jvnicnfl.,u<    sli-idcs     iowar<l     pcrhTiion     i> 
•'<'fiJJ'i"ii     i.now].-l^(..     'ill,,     coi-ivlaiion     wiiii     rcoiinniic 
tacior--  oj  chanuv-  in  popul'ilion  nxK^  to  chanuv-  in  hii'ih- 
ralc-.    niarria,uc-i-a!t'<    and    dcath-i-alcs.   ha<    hccn    cxicn- 
sivcly    invest i.u'a 1 0.1    and    (^xactly   dc^ciilu'd.     Tho    rhan^L' 
in  the  qnahly  of  flic  population,  tojiothcr  with  the  (■au^t^s 
of  ilic  chanirc  i<  ix^in^  prop(M'ly  in\T<t i;:atcd  in  the  werk 
"^    ^hf    scIkh))    (,,f   <Miot.}ijc^_      11if<('    t^^•(^     doprtrt  iiicni  -     of 
tlyjianiic   (■(•(innniics.    the    thcoi-y   of    poimlanon   anu    liic 
i^J''"^'}'   <'^  'Ti-c-.    which   alone  anionn;  dynainii'   pi'ohlenis 
are    a--i]niinL:    an    app!'oxiniat«']\-    -aii-facio]'\-    -'•ionnlie 
h'l'ni.    ano    winch    -hould    iheivfuiv    -(  j-\-c    a<    ni'MJcl-    fui- 
the  df^x-clnpnien;   of  other  do; .arnnfni -.  nwc  tlieii'  niv-.-nt 
Sf'ii'ntihc  lorwardn*-^  lo  the  utilizadfCi  .,f  ivc^nt  -laii-tiral 
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ina!!!'- 1  m  f  h*-  i.'ahn  oj'  p-n-.'  \  he.  ir\-. 

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RAILROADS  IN  THEIR  CORPORATE  RELATIONS.* 

SUMMARY. 

Causes  of  railroad  amalgamation,  34. — Corporate  control  of  rail- 
roads defined,  36. — Control  through  lease,  38. — Control  through 
ownership  of  securities,  39. — Joint  control,  41. — Virtual  control,  44. — 
Inactive  corporations,  45. — Minority  holdings  of  railroad  securities, 
46. — Holding  companies:  trust  companies,  intermediate  holding  com- 
panies, land  and  improvement  companies,  50. — Entanglements  of  the 
intercorporate  relationship,  54. — Holding  companies  at  the  head  of 
systems:  Atlantic  Coast  Line  Company,  Reading  Company,  Rock 
Island  Company,  58. — Purpose  of  the  holding  company  and  reasons 
for  public  opposition,  61. — Suggested  remedies,  64. 

For  many  years,  concentration  of  railroad  interests 
in  the  United  States  has  been  recognized  as  a  "growing 
tendency."  At  the  present  time,  so  far  has  the  move- 
ment proceeded,  it  may  ahnost  be  regarded  as  an  accom- 
pUshed  fact.  An  illustration  may  be  taken  from  the 
monthly  reports  made  to  the  Division  of  Statistics  and 
Accounts  of  the  Interstate  Commerce  Commission.  Up 
to  August  10  of  this  year  750  reports  had  been  received 
of  May  revenues  and  expenses,  covering  226,407  miles  of 
line  operated.  Of  this  total,  197,600  miles,  or  87  per  cent., 
were  comprised  within  forty  railroad  systems,  including 
monthly  reports  from  322  separate  railroad  corporations. 

The  suggested  causes  for  this  amalgamation  of  railroad 
lines  have  been  numerous  and  diverse.  Desire  for  control 
pure  and  simple — the  satisfaction  which  comes  from  the 
exercise  of    power — has  played  its   part.    The  wish  to 

1  The  author  of  this  article  was  connected  during  the  year  1907-08  with  the 
Division  of  Statistics  and  Accounts  of  the  Interstate  Commerce  CSommission,  and 
was  responsible  for  the  compilation  and  for  the  technical  portion  of  the  text  of 
Special  Report  No.  1  on  Intercorporate  Relationships  of  Railways  in  the  United 
States  as  of  June  30,  1906  (Government  Printing  Office,  1908).  This  article  pre- 
sents in  an  informal  manner  the  results  of  that  study,  together  with  comments 
and  expressions  of  opinion  for  which  obviously  the  author  is  alone  responsible. 


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RAILROADS  IN  THEIR  CORPORATE  RELATIONS       35 

provide  opportunities  for  market  manipulation  and  specu- 
lative gains  has  been  an  influential  motive.  The  tendency 
of  business  in  this  country  to  be  assembled  in  large  units 
for  the  promotion  of  economies  in  administration  and 
general  efficiency  has  unquestionably  contributed  its 
influence  to  the  movement.  But,  more  than  all  these, 
the  attempt  to  operate  railroads  in  freedom  from  legisla- 
tive and  judicial  interference,  and  at  the  same  time  to 
avoid  the  disastrous  results  of  an  unrestrained  competition, 
has  been  charged  or  credited,  according  to  one's  point  of 
view,  with  being  the  principal  incentive  to  consoHdation 
or  concentration  of  railroad  interests.  For  the  railroads 
were  compelled,  with  the  dissolution  of  pools  by  the 
passage  of  the  anti-pooling  clause  of  the  Interstate  Com- 
merce Act,  and  with  the  disbanding  of  the  traffic  associa- 
tions by  the  judicial  interpretation  of  the  Sherman  Anti- 
trust Act,  to  attain  their  desired  end  by  more  thorough- 
going methods. 

The  present  discussion  has  not  to  do  with  tracing  the 
fife  history  of  this  concentration  movement  among  rail- 
roads, nor  with  presenting  a  detailed  picture  of  the  present 
situation.  Because  of  the  multipUcity  of  detail,  such  a 
picture  would  be  tedious  and  confusing,  and,  as  a  presen- 
tation of  the  actual  situation,  could  not  hope  to  be 
accurate  for  any  length  of  time.  This  paper  is  concerned 
rather  with  such  fundamental  principles  as  seem  to 
underUe  the  relationships  of  railroads,  and  will  therefore 
resort  to  actual  conditions  merely  for  the  purpose  of 
illustration.^ 

1  Poor's  Manual  of  Railroads  and  Moody's  Manual  of  Railroads  and  Corporation 
Securities  give  the  details  and  the  changes  from  year  to  year  in  the  intercorporate 
relations  of  railroads.  While  they  have  no  power  to  elicit  information  and  rely 
in  the  main  upon  published  reports,  they  are  fairly  accurate  in  their  statements 
of  facts.  This  paper,  while  drawn  mainly  from  the  Intercorporate  Relationship 
investigation,  as  of  June  30,  1906,  brings  its  illustrations,  unless  otherwise  noted, 
down  to  June  30,  1907.  It  is  impossible  to  secure  official  information  of  a  later 
date,  as  the  annual  reports  of  railroads  for  the  year  ending  June  30,  1908,  are  not 
required  to  be  submitted  to  the  Interstate  Commerce  Commission  until  October  31. 


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Consideration  will  first  be  given  to  alliances  which  are 
sufficiently  intimate  to  effect  the  control  of  one  corporation 
by  another.  By  control  of  a  corporation  is  meant  the 
power  to  dictate  the  poHcy  of  such  corporation.  This 
movement  for  control  has  assumed  various  phases.  The 
simplest  case  is  that  in  which  a  railroad  desires  to  enlarge 
its  territory  and  influence,  where  efficient  railroading 
demands  that  joint  arrangements  with  branch  connecting 
lines  be  superseded  by  centraUzed  management,  or  in 
which  the  constant  pushing  out  of  branches  to  gather 
in  new  sources  of  traffic  is  essential  to  the  very  Ufe  of 
the  main  stem  of  a  railroad  line.  Then  there  is  the  exten- 
sion of  the  main  line  into  sections  not  before  reached, — 
the  transformation  of  a  railroad  serving  a  locality  into  a 
system  that  traverses  a  section  and  then  half  a  continent, — 
illustrated  in  the  policy  of  Eastern  ' 'trunk  Unes,"  which 
early  reaUzed  the  advantages  of  tapping  the  producing 
sections  and  by  unified  control  and  management  reducing 
to  the  lowest  point  the  cost  of  handhng  the  enormous 
traffic  in  raw  materials.  The  latest  phases  of  this  move- 
ment are  seen  in  the  newly  constructed  and  projected 
lines  to  the  Pacific  and  in  the  plans  of  certain  interests 
for  controlling  transcontinental  lines  that  touch  both 
oceans. 

Frequently  the  acquisition  of  control  of  an  individual 
railroad  is  a  part  of  some  such  far-sighted  plan  which  does 
not  appear  on  the  surface,  but  is  still  only  a  dream  or 
a  desired  culmination  in  the  mind  of  a  dominating  finan- 
cier, and  which  becomes  clear  to  the  pubhc  only  after  all 
the  links  have  been  connected  and  the  system  takes  visible 
form.  One  has  only  to  read  the  financial  page  of  the 
daily  newspaper  and  take  note  of  the  rumors  of  new  cor- 
porate alignments  to  realize  how  alert  is  the  public  to 
scent  incipient  plans  of  this  nature.  Only  on  some  such 
theory  as  this  can  many  of  the  relationships  of  widely 


RAILROADS  IN  THEIR  CORPORATE  RELATIONS      37 

separated  railroad  corporations  be  explained.  Rivalry 
between  different  financial  groups  has  accelerated  the 
movement  and  has  forced  one  group  to  meet  the  gigantic 
projects  of  another  or  suffer  loss  of  business  and  of  prestige. 

As  we  have  seen,  the  motives  underlying  the  movement 
are  not  wholly  economic,  altho  this  motive  is  the  dominant 
one.  The  prestige  that  springs  from  corporate  power  and 
financial  control  is  a  precious  possession,  to  be  guarded  at 
all  hazards  and  enhanced  at  every  opportunity.  This 
competitive  struggle  for  financial  power  justifies  itself  only 
so  long  as  it  keeps  its  feet  sohdly  on  economic  ground.  If 
the  development  of  systems  works  for  efficiency  in  trans- 
portation, in  the  way  of  better  service  and  lower  rates,  it 
can  be  defended;  but  experience  proves  that,  in  most 
cases,  such  rivalry  has  led  to  absorption  of  railroads  merely 
because  of  their  strategic  advantage  in  a  warfare  of  finan- 
cial interests.  It  is  but  a  short  step  from  this  practise 
to  stock  jobbing,  manipulation,  and  often  railroad  wreck- 
ing, and,  when  the  interests  involved  have  had  enormous 
resources  at  their  command,  the  influence  of  such  prac- 
tises has  not  been  confined  to  railroads,  but  can  be  traced 
into  the  management  of  banks,  insurance  companies,  and 
other  financial  and  fiduciary  institutions.  Such  repre- 
hensible practises  have  been  particularly  evident  in  the 
management  of  railroads  in  which  boards  of  directors, 
elected  for  the  purpose  of  directing  a  transportation 
agency,  have  delegated  their  functions  to  one  dominating 
personaUty,  and  have  then  gone  about  their  business. 

Finally,  as  a  cause  of  railroad  control  there  may  be  men- 
tioned the  motive  of  pure  investment.  But  this  is  very 
infrequently  a  dominating  motive.  Investments  by  rail- 
roads in  the  securities  of  other  railroads  are  common, 
but,  unless  some  other  motive  is  present,  they  rarely  extend 
to  the  point  of  actual  control. 


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Control  over  a  corporation  may  be  established  in  a 
variety  of  ways;  but  the  two  principal  methods  of  effect- 
ing the  result  are  control  through  possession  of  securities, 
usually  stock  or  its  equivalent,  and  control  through  some 
form  of  contract,  such  as  a  lease.  It  is  somewhat  ques- 
tionable whether  a  lease  contract  gives  control  at  all, 
for  on  its  face  it  usually  transfers  merely  the  use  of  physi- 
cal property  of  a  corporation  for  a  Hmited  term  of  years 
and  leaves  the  corporate  organization,  with  its  board  of 
directors  and  its  stockholders,  untrammelled.  The  corpo- 
ration, at  least  formally,  continues  its  existence,  main- 
tains its  organization,  and  distributes  as  dividends  on 
stock  the  rentals  received  from  the  lessee  company. 
Breach  of  contract,  a  receivership,  or  the  termination  of 
the  contract,  may  restore  the  property  of  the  lessor  com- 
pany to  its  stockholders.  This  is  the  strict  legal  relation 
of  the  two  corporations,  and  from  this  standpoint  it  would 
seem  proper  to  disregard  such  relationships  in  any  consid- 
eration of  intercorporate  control.  Yet  a  careful  study  of 
lease  contracts  reveals  the  fact  that  the  relationship  of 
lessor  and  lessee  extends  all  the  way  from  an  adherence 
to  a  strict  legal  interpretation  of  the  independence  of  the 
two  corporations  to  a  virtual  absorption  of  the  lessor 
company  in  the  lessee. 

In  the  latter  case,  the  lease  usually  runs  in  perpetuity 
or  for  a  length  of  time  practically  equivalent.  The  stock 
of  the  lessor  is  practically  all  owned  by  the  lessee,  the 
lessee  has  often  issued  securities  of  its  own  to  cover  the 
absorbed  property,  and  has  pledged  the  stock  of  the  lessor 
company  for  the  new  issue,  or  is  carrying  it  on  its  books 
merely  as  a  record  of  title.  Frequently  the  only  posses- 
sion remaining  to  the  lessor  corporation  is  its  franchise. 
The  lessor  company  becomes,  in  other  words,  an  inactive 
corporation,  existing  neither  for  the  purpose  of  conducting 
a  railroad  business  nor  for  the  purpose  of  distributing 


RAILROADS  IN  THEIR  CORPORATE  RELATIONS      39 

income  to  its  stockholders.  It  is  such  cases  which  can 
properly  be  classified  as  forms  of  control,  tho  even  here 
the  lessor  is  still  in  law  an  independent  corporation.  A 
good  illustration  of  a  lease  that  is  merely  formal  in 
character  is  found  in  the  Dayton  &  Western  Raih-oad 
Company,  which  in  1865  leased  all  of  its  property  of  every 
kind  to  the  Little  Miami  and  Columbus  &  Xenia  Rail- 
road companies  for  the  term  of  ninety-nine  years,  renew- 
able forever,  subject  to  a  mortgage  securing  the  payment 
of  $738,000  of  bonds  due  in  1905.  The  lessee  guaranteed 
payment  of  principal  and  interest  on  the  bonds  and  all 
taxes  and  assessments,  the  rental  payment  being  the 
interest  on  the  bonds  until  maturity,  and  thereafter  5  per 
cent,  per  annum.  But,  after  the  payment  of  the  bonds, 
the  lessee  might  at  any  time  demand  a  conveyance  of  the 
raikoad  in  fee  simple  without  further  consideration. 
The  Columbus  &  Xenia  Raikoad  was  subsequently  leased 
to  the  Little  Miami,  and,  by  a  later  lease,  the  little  Miami 
was  conveyed  to  the  Pittsburg,  Cincinnati,  Chicago  &  St. 
Louis  Railway  Company.  The  bonds  of  the  Dayton  & 
Western  have  now  been  paid,  and  the  corporation  exists 
merely  for  the  purpose  of  formally  conveying  title  when 
that  act  is  demanded. 

But  the  clearest  form  of  control  is  that  established 
through  the  possession  of  securities.  Sometimes  the  pos- 
session of  bonds  is  sufficient  where  bonds  have  the  con- 
trolling voting  power,  or  where,  interest  having  been 
defaulted,  the  holders  of  bonds  possess  right  of  foreclosure. 
Occasionally  a  corporation  holds  a  majority  of  voting  trust 
certificates  representing  stock  deposited  with  trustees. 
While  not  in  direct  control  of  the  corporation  whose  certifi- 
cates are  held,  the  owning  company,  nevertheless,  names 
the  trustees,  and  comes  into  possession  of  the  stock  when 
the  trust  is  dissolved.  An  illustration  of  this  relationship 
is  the  ownership  by  the  Seaboard  Company  of  a  majority 


40 


QUARTERLY  JOURNAL  OF  ECONOMICS 


li 


of  the  voting  trust  certificates  of  the  Seaboard  Air  Line 
Railway. 

But  by  far  the  greater  number  of  railroad  corporations 
are  controlled  through  the  ownership  of  stock,  obtained 
sometimes  by  exchange  of  securities,  either  stock  or  bonds, 
for  the  stock  acquired;   sometimes  by  the  sale  of  bonds 
on  the   market   and   the   purchase   of  stock   with   the 
proceeds;    and  sometimes,   altho    not    commonly  when 
large  purchases  are  involved,  by  direct  appropriation  of 
cash  from  the  treasury.    It  is  by  the  acquisition  of  voting 
securities  that  the  large  systems  have  in  the  main  been 
built  up.     This  does  not,  of  course,  mean  that  the  head 
corporation,  which  gives  its  name  to  the  system,  necessa- 
rily itself  owns  the  securities  of  all  the  corporations  which 
it  controls.     In  practically  all  the  large  systems  the  poUcy 
of  indirect  control  is  followed  to  a  greater  or  less  extent; 
that  is,  corporations  subsidiary  to  the  head  of  the  system 
in  their  turn  control  other  corporations,  so  that  a  hier- 
archy of  corporate  interests  is  created,  often  of   a  most 
intricate  nature.    It  is  this  fact  that  made    so   difficult 
the  work  of  compilation  in  the  Interstate  Commerce  report 
already  referred  to,  and  it  is  the  presentation  of  this  rela- 
tionship in   tabular  form  that   constitutes  perhaps  the 
most  valuable  feature  of  the  report.    To  take  a  famihar 
instance,  the  New  York  Central  &  Hudson  River  Rail- 
road   Company  controls    the    Lake    Shore    &    Michigan 
Southern  through  ownership  of  a  httle  over  90  per  cent, 
of  its  stock.    The  latter  in  turn  controls  the  Cleveland, 
Cincinnati,  Chicago  &  St.  Louis    through    ownership  of 
53  per  cent,  of  its  stock,  and  the  New  York,  Chicago  & 
St.  Louis  through  ownership  of  a  Uttle  over  50  per  cent, 
of  its  stock.    These  roads  in  turn  control  others,  so  that 
the  influence  of  New  York  Central  management  runs  down 
the  hne  until  it  reaches  the  most  insignificant  branches. 
Thus  has  this  great  system  been  built  up  until  it  aggre- 


■«^ 


RAILROADS  IN  THEIR  CORPORATE  RELATIONS       41 

gates  nearly  12,000  miles  and  represents  a  total  outstand- 
ing capitalization,  both  stock  and  bonds,  of  over  $1,300,- 
000,000. 

In  many  cases  a  railroad  corporation,  in  addition  to  its 
control  through  title  to  a  majority  of  the  voting  securi- 
ties, is  also  the  lessee  of  the  controlled  corporation.  Usu- 
ally the  lease  contract  comes  first  in  point  of  time,  and 
then,  later,  stock  is  acquired  sufficient  to  insure  voting 
control,  as  the  advantages  of  a  closer  intercorporate 
relationship  become  clear.  But  sometimes  the  lease  con- 
tract is  subsequent  to  the  establishment  of  control  through 
stock  ownership.  The  execution  of  a  lease  under  these 
circumstances,  or  the  continuance  of  an  early  lease  when 
stock  control  would  seem  to  render  such  contract  unneces- 
sary, finds  its  explanation  in  the  fact  that  a  railroad  cor- 
poration holding  a  bare  majority  of  the  stock  of  another 
railroad  is  enabled,  through  the  exercise  of  its  voting 
control,  to  arrange  an  advantageous  contract  with  its 
subsidiary  corporation  which  remains  fixed  during  the  Ufe 
of  the  lease,  and  is  thus  able  to  free  itself  from  the  impor- 
tunities of  a  possibly  dissatisfied  minority  of  the  lessor 
corporation  for  a  considerable  length  of  time. 


Thus  far  discussion  has  been  confined  to  control  exer- 
cized by  a  single  corporation.  But  there  are  frequent 
cases  of  joint  control,  the  participating  corporations 
sometimes  numbering  as  high  as  twelve.  The  fact  of 
joint  control  is  diflicult  to  establish,  because  the  Une  of 
distinction  is  not  clear  between  the  mere  contempora- 
neous investment  of  several  railroads  in  the  same  cor- 
porate stock  and  the  acquirement  of  securities  under  an 
agreement  for  joint  control.  Joint  control  necessitates, 
of  course,  an  agreement  between  the  parties  in  interest, 
but  these  agreements  are  frequently  so  informal  that  they 
escape   detection.     Moreover,  railroads  have   been  very 


42 


QUARTERLY  JOURNAL  OF  ECONOMICS 


reluctant  to  admit  the  existence  of  such  agreements,  pos- 
sibly because  they  fear  that  the  revelation  of  joint  con- 
tracts of  any  character  may  render  them  Uable  to  prose- 
cution under  the  Anti-trust  Act.  In  the  Intercorporate 
Relationship  investigation  it  was  found  necessary  to  adopt 
the  wholly  reasonable  basis  of  interpretation  that  when 
railroad  corporations  invested  simultaneously  in  the 
securities  of  a  corporation  in  which  they  were  all  obviously 
interested,  such  as  a  terminal  or  switching  company,  and 
particularly  when  the  amount  of  the  investment  was 
practically  identical  for  each  of  the  investing  corpora- 
tions, the  corporation  whose  securities  were  acquired  was 
to  be  regarded  as  jointly  controlled. 

Joint  control  may  be  created  by  lease,  as  in  the  case 
of  the  joint  lease  of  the  Georgia  Railroad  by  the  Atlantic 
Coast  Line  and  the  Louisville  &  Nashville,  but  usually 
such  control  is  based  upon  stock  ownership.  An  illustra- 
tion of  this  is  the  control  of  the  Chicago,  Indianapolis  & 
Louisville  by  the  Southern  and  the  Louisville  &  Nashville 
through  joint  ownership  of  88  per  cent,  of  the  stock.  Two 
interesting  cases  in  which  the  Harriman  interests  were 
involved  are  those  of  the  North-western  Pacific  and  the 
Chicago  &  Alton.  The  first-named  corporation  was  organ- 
ized to  consohdate  all  the  competing  lines  of  the  Santa  F^ 
and  the  Southern  Pacific  systems  north  of  San  Francisco 
Bay,  and  the  board  of  directors  is  divided  between  these 
two  controlUng  systems.  In  the  case  of  the  Alton,  the 
Union  Pacific  and  the  Rock  Island  deposited  a  controlling 
interest  with  the  Central  Trust  Company  of  New  York, 
imder  an  agreement  by  which  the  control  of  the  board  of 
directors  was  to  be  transferred  in  successive  years  from 
one  to  the  other.^ 

Agreements  for  joint  control  do  not  always  include  all 

1  This  agreement  has  been  annulled,  and  control  of  the  Alton  passed  in  August, 
1907,  to  the  Toledo,  St.  Louis  &  Western  Railroad  Company. 


RAILROADS  IN  THEIR  CORPORATE  RELATIONS       43 

of  the  large  corporate  stockholders.  Note,  for  example, 
the  case  of  the  Southwestern  Construction  Company,  the 
holding  company  for  the  stock  of  the  Cincinnati,  New 
Orleans  &  Texas  Pacific  Railway.  About  80  per  cent,  of 
the  stock  of  the  former  corporation  is  controlled  by  the 
Southern  Railway  and  the  Cincinnati,  Hamilton  &  Dayton 
through  direct  ownership  and  through  the  holdings  of 
their  subsidiary  corporations.  Nearly  $450,000  of  stock, 
or  over  20  per  cent.,  is  owned  by  the  Alabama,  New 
Orleans,  Texas  &  Pacific  Junction  Railways  Company, 
Limited.  Yet  this  latter  corporation  has  no  voice  in  the 
management  of  the  Southwestern  Construction  Company. 
The  Southern  Railway  elects  four  directors,  the  Cincin- 
nati, Hamilton  &  Dayton  four,  and  these  eight  choose  the 
ninth  and  remaining  member. 

In  agreements  for  joint  control  a  corporation's  influence 
in  the  affairs  of  the  controlled  company  is  not  always 
proportionate  to  its  investment.  For  example,  the  stock 
of  the  Des  Moines  Union  Railway  Company  is  owned  five- 
eighths  by  F.  M.  Hubbell  Son  &  Co.,  two-eighths  by  the 
Chicago,  Milwaukee  &  St.  Paul  Railway  Company,  and 
one-eighth  by  the  Wabash  Raiboad  Company.  Yet  a 
director  cannot  be  elected,  the  articles  of  incorporation 
amended,  or  the  capital  stock  increased  except  by  a  vote 
of  more  than  seven-eighths  of  the  stock,  which  means 
unanimous  consent. 

In  rare  cases  joint  control  is  shared  by  a  corporation 
and  an  individual,  as,  for  example,  in  the  case  of  the  San 
Pedro,  Los  Angeles  &  Salt  Lake  Railroad  Company. 
This  line,  as  projected,  threatened  the  traffic  of  the  South- 
ern Pacific.  By  legal  proceedings  Mr.  Harriman  prevented 
the  construction  of  portions  of  this  road  until  an  agree- 
ment had  been  effected  between  himself  and  the  builder, 
Mr.  W.  A.  Clark,  as  a  result  of  which  the  stock  of  the 
raihoad   was   deposited   with   the   Farmers'    Loan   and 


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Trust  Company  as  trustee  and  was  to  be  owned  half  and 
half  by  the  Oregon  Short  Line  and  Mr.  Clark  and  his 
associates.^ 

Most  of  the  cases  where  control  is  shared  by  two  or 
more  railroad  corporations  have  an  obvious  explanation 
and  are  justified  on  economic  grounds.  They  arise  where 
terminal  tracks,  a  union  station,  or  a  short  connecting 
line,  is  necessary  to  the  operation  of  a  number  of  railroad 
systems.  Frequently  the  expense  of  construction  and 
operation  of  such  joint  property  represents  the  only  invest- 
ment that  the  railroads  make,  and  stock,  if  issued  at  all, 
is  distributed  to  each  contributor  merely  as  a  matter  of 
form.  But  instances  such  as  the  San  Pedro  case  are  less 
defensible,  and  contain  within  themselves  more  than  a 
possibility  of  effecting  that  ''restraint  of  trade '^  which  the 
courts  have  so  frequently  denounced. 

Virtual  control  of  a  railroad  corporation  may  be  main- 
tained even  when  less  than  a  majority  of  stock  is  owned. 
Thus  in  some  cases  the  stock  necessary  to  convert  a  minor- 
ity into  a  majority  holding  is  in  the  possession  of  individuals 
or  groups  of  individuals  whose  interests  are  identical  with 
those  of  the  holding  corporation.  Well-known  instances 
of  this  kind  include  the  control  by  the  Chicago  &  North- 
western Railway  of  the  Chicago,  St.  Paul,  Minneapolis  & 
Omaha,  in  which  a  holding  of  $1,500,000  of  stock  by 
F.  W.  Vanderbilt  is  necessary  to  make  a  majority.  The 
ownership  of  45i  per  cent,  of  the  stock  of  the  Southern 
Pacific  Company  by  the  Oregon  Short  Line  Railroad 
Company — a  part  of  the  Union  Pacific  system — doubtless 
belongs  in  the  same  category,  altho  the  individual  financial 
interests  which  fill  the  gap  are  not  revealed.  A  concen- 
trated minority  holding  is  doubtless  in  many  cases  fully 
as  effective  as  an  actual  majority  would  be,  because  of 

*  The  agreement  also  contains  provisions  relative  to  division  of  traffic  and 
territory  with  which  this  discussion  is  not  concerned. 


RAILROADS  IN  THEIR  CORPORATE  RELATIONS       45 

the  scattered  distribution  of  the  majority  ownership  in 
small  lots.  Yet  the  occasional  market  raids  during  the 
last  decade  on  the  stock  of  prominent  raiboad  corporations 
have  led  financial  interests  to  question  the  security  of  a 
minority  holding,  however  large  and  concentrated,  and 
to  endeavor  to  ally  with  the  corporate  holding  a  sufficient 
amount  of  personal  holdings  to  insure  an  actual  voting 
majority.  The  revised  annual  report  form  of  the  Inter- 
state Commerce  Commission,  upon  which  railroads  are 
making  their  returns  for  the  year  ending  June  30,  1908, 
calls  for  the  ten  largest  stockholders  of  each  corporation. 
This  information  gathered  currently  will  enable  the  pubUc 
to  keep  accurately  in  touch  with  the  investments  of  large 
financial  groups,  and  will  make  possible  in  the  future  a 
clearer  understanding  of  these  alUances  of  individual  and 
corporate  interests.  This  method  of  corporate  control 
through  the  aid  of  individuals  undoubtedly  adds  an 
element  of  difficulty  to  any  attempt  at  regulation  or 
judicial  interference.^ 

This  treatment  of  intercorporate  control  has  had  to  do 
with  the  securities  of  active  railroad  corporations ;  that  is, 
with  the  securities  of  those  corporations  which  either 
operate  railroad  property  or,  as  owners  of  railroad  property 
operated  by  other  corporations,  maintain  an  organization 
for  the  distribution  of  income  to  stockholders.  But  there 
is  a  very  large  number  of  railroad  corporations,  whose 
securities  are  found  on  the  books  of  the  controlling  cor- 
poration, that  perform  neither  function  and  that  still 
exist  in  contemplation  of  law.  In  some  cases  such  cor- 
porations still  retain  title  to  their   property;    in  other 

1  Were  this  article  not  confined  to  railroad  corporations,  it  woiild  be  interest- 
ing to  discuss  the  significance  of  the  control  by  railroads  of  steamship  lines,  such, 
for  example,  as  the  control  of  the  Pacific  Mail  Steamship  Company  by  the  Southern 
Pacific  and  of  the  Old  Dominion  Steamship  Company  by  the  Chesapeake  &  Ohio, 
Southern   Seaboard  Air  Line,  Norfolk  &  Western,  and  Atlantic  Coast  Line. 


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cases  they  have  transferred  title  to  the  controlling  cor- 
poration, and  retain  merely  their  corporate  right  to  be/ 
The  property  represented  by  such  inactive  corporations 
has  in  almost  every  case  been  absorbed  into  the  operating 
system  of  the  controlhng  corporation,  and  it  would  natu- 
rally be  expected  that  the  corporate  existence  of  such 
inactives  should  be  discontinued.  To  some  extent  this 
has  taken  place,  and  corporations  have  unified  and 
simpUfied  their  organization  by  ending  the  Hfe  of  their 
''inactives."  Nevertheless,  these  moribund  companies  still 
exist  in  great  numbers,  doubtless  because  their  charters 
give  them  certain  privileges  which  counsel  for  the  con- 
trolhng roads  regard  as  valuable  possessions  against  a 
future  emergency.  The  total  outstanding  securities  of 
these  inactive  corporations  on  June  30,  1906,  amounted 
to  $412,000,000  of  funded  debt  and  $771,000,000  of 
stock.  Of  the  funded  debt  $120,000,000  was  in  the  hands 
of  the  pubUc.  Some  of  it  was  doubtless  of  no  value, 
but  most  of  it  had  been  assumed  as  a  direct  obUgation  of 
the  absorbing  road.  Only  $5,500,000  of  the  total  amount 
of  stock  was  still  outstanding,  and  this  doubtless  has  no 
value  at  all  and  could  be  located  with  difficulty.  The 
absorption  of  such  inactive  corporations  has  been  complete. 

Thus  far  the  discussion  has  been  concerned  with  the 
question  of  intercorporate  control.  But  there  exists  to 
an  enormous  extent  corporate  ownership  of  railroad  secu- 
rities, which,  altho  falUng  short  of  control,  secures  for  the 
holding  corporation  a  potent  influence  in  the  affairs  of 
the  railroad  whose  securities  are  owned.  It  would  be 
tedious  merely  to  enumerate  here  the  Ust  of  important 
alliances  of  this  character.  Furthermore,  official  informa- 
tion is  available  only  as  late  as  the  year  ending  June  30, 

iln  still  other  cases  corporate  existence  has  ceased,  but  the  stock  of  the  dead 
company  is  carried  on  the  books  of  the  successor  as  a  matter  of  record. 


RAILROADS  IN  THEIR  CORPORATE  RELATION S'f I ^7 

1907,  and  a  statement  of  these  facts  would  not  picture  the 
present  situation  with  entire  accuracy.  The  motives  of 
financial  interests  change  as  conditions  change;  legisla- 
tion makes  certain  holdings  undesirable,  as  illustrated, 
for  example,  in  the  sale  of  stock  of  "coal  roads''  since  the 
passage  of  the  Hepburn  Act  with  its  "commodity  clause"; 
financial  difficulties  sometimes  compel  a  railroad  to  con- 
vert its  influence  in  other  roads  into  cash,  as  in  the  recent 
reported  sale  by  the  Erie  of  its  Lehigh  Valley  stock.  Old 
alhances  are  dissolved  and  new  ones  formed  with  bewilder- 
ing frequency.  As  illustrations  of  these  minority  holdings 
acquired  for  the  purpose  of  influencing,  if  not  controlling, 
the  pohcy  of  other  roads,  may  be  mentioned  the  holdings 
of  the  Pennsylvania  Railroad  system  in  the  Baltimore  & 
Ohio,  the  Norfolk  &  Western,  and  the  New  York,  New 
Haven  &  Hartford;  the  holdings  of  the  New  York  Central 
system  in  the  Chesapeake  &  Ohio  and  the  New  York, 
New  Haven  &  Hartford;  the  holdings  of  the  Baltimore  & 
Ohio,  the  Chesapeake  &  Ohio,  the  Erie,  the  Lake  Shore, 
and  the  "Panhandle"  in  the  Hocking  Valley;  the  holdings 
of  the  Lackawanna,  the  Erie,  the  Lake  Shore,  the  Reading, 
and  the  Central  of  New  Jersey  in  the  Lehigh  Valley;  of  the 
Chicago  &  Northwestern  in  the  Union  Pacific ;  and  of  the 
Missouri  Pacific  in  the  Denver  &  Rio  Grande,  the  Texas 
&  Pacific,  and  the  Wabash.  A  most  interesting  in- 
stance which  approaches  a  condition  of  joint  control  is 
the  influence  of  the  Pennsylvania  and  the  New  York 
Central  systems  in  the  Reading  Company  through  the 
holding  by  the  Baltimore  &  Ohio  and  the  Lake  Shore 
of  over  $30,000,000  each  in  Reading  stock,  an  aggregate 
of  over  43  per  cent. 

During  the  interval  between  the  annual  reports  to  the 
Interstate  Commerce  Commission  for  1906  and  1907  the 
Pennsylvania  system  disposed  of  all  its  Chesapeake  & 
Ohio  stock,  amounting  to  over  $15,000,000,  and  the  New 


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48  QUARTERLY  JOURNAL  OF  ECONOMICS 

York  Central  system  sold  $4,500,000  of  its  holdings  in  the 
same  road.  Who  the  purchasers  were  does  not  appear. 
A  more  interesting  case  is  the  reduction  in  the  Pennsyl- 
vania holdings  of  Baltimore  &  Ohio  stock  from  $73,000,000 
to  $42,500,000.  At  the  same  time  there  appears  among 
the  new  holdings  of  the  Oregon  Short  Line  for  the  year 
1907  about  $40,000,000  of  Baltimore  &  Ohio  stock,  and 
among  the  new  holdings  of  the  Pennsylvania  Company 
$34,000,000  of  Oregon  Short  Line  bonds.  An  inference 
that  would  be  fairly  accurate  might  be  drawn  concerning 
this  particular  ramification  of  Harriman  finance. 

As  a  rule,  these  minority  holdings  are  in  the  securities 
of  railroads  that  have  traffic  relations  with  the  holding 
corporation,  and  that  lie  in  the  same  general  traffic  terri- 
tory,—where,  in  other  words,  influence  in  management 
will  promote  harmony  of  operation,  if  not  community  of 
interest.  But  occasionally,  as  ah-eady  noted,  a  raikoad 
corporation  purchases  widely  in  the  securities  of  other 
raih-oads,  possibly  to  some  extent  for  pure  investment 
purposes,  but  more  probably  with  far-reaching  plans  for 
future  coalitions.  The  most  striking  instance  of  this  char- 
acter is  seen  in  the  case  of  the  Oregon  Short  Line  Railroad 
Company,  which  is  the  principal  ''holding  company"  for 
Mr.  Harriman's  system  of  raihoad  lines,  and  which  he  has 
made  the  depository  for  a  large  proportion  of  his  purchases 
during  the  conduct  of  his  pyrotechnic  finance.  The  im- 
portant holdings  of  the  Oregon  Short  Line  in  the  securities 
of  other  railroad  corporations  on  June  30,  1907,  were  as 
follows : — 

Atchison,  Topeka  &  Santa  F6,  preferred $10,000,000 

Baltimore  &  Ohio,  common 32,334,200 

Baltimore  &  Ohio,  preferred 7,206,000 

Chicago,  Milwaukee  &  St.  Paul,  common 3,690,000 

Chicago,  Milwaukee  &  St.  Paul,  common,  25  per  cent,  paid,  922,500 

Chicago,  Milwaukee  &  St.  Paul,  preferred,  25  per  cent,  paid,  1,845,000 

Chicago  &  Northwestern,  common 3,215,000 


RAILROADS  IN  THEIR  CORPORATE  RELATIONS       49 

Great  Northern,  preferred $9,036,400 

Great  Northern,  preferred,  50  per  cent,  paid 3,614,560 

New  York  Central  &  Hudson  River 14,285,700 

Northern  Pacific,  common 4,152,800 

Northern  Pacific,  common,  12 J  per  cent,  paid 2,491,600 

Northern  Securities,  stubs      724,900 

San  Pedro,  Los  Angeles  &  Salt  Lake 12,500,000 

San  Pedro,  Los  Angeles  &  Salt  Lake,  first  mortgage  bonds,  20,000,000 

Southern  Pacific,  common 90,000,000 

Southern  Pacific,  preferred 18,000,000 

Southern  Pacific,  preferred,  25  per  cent,  paid 16,200,000 

In  addition,  it  may  be  noted  that  the  Union  Pacific  Rail- 
road Company  owns  $10,343,100  of  the  stock  of  the  Chi- 
cago &  Alton,  also  $18,623,100  of  Illinois  Central  stock 
directly,  and  $8,000,000  through  control  of  the  Railroad 
Securities  Company. 

That  this  policy  of  Mr.  Harriman's  has  been  deliberately 
entered  upon  is  shown  by  his  testimony  in  a  hearing 
before  the  Commission,  in  which  he  said,  "If  I  thought  we 
could  realize  something  more  than  we  have  got  from  these 
investments,  I  would  go  on  and  buy  some  more  things.  .  .  . 
If  you  will  let  us,  I  will  go  and  take  the  Santa  F6  to- 
morrow."^ That  he  is  still  pursuing  the  same  poUcy  is 
shown  in  his  recent  purchase  of  the  stock  of  the  Central  of 
Georgia  which  connects  with  the  Illinois  Central  at  Bir- 
mingham, Alabama,  and  in  the  financial  aid  which  he  is 
reported  to  have  given  this  year  to  both  the  Erie  and  the 
Wheeling  &  Lake  Erie  Railroads,  which  have  presumably 
given  him  an  influence  in  their  councils. 

That  the  intercorporate  holdings  of  railroad  securities 
reach  an  enormous  aggregate  is  shown  by  the  Interstate 
Commerce  Commission's  investigation  which  presents  the 
situation  on  June  30,  1906.  This  investigation  shows 
that  of  the  total  outstanding  stock  of  railroad  corporations 

'  In  the  Matter  of  Consolidations  and  Combinations  of  Carriers,  Relations 
between  such  Carriers,  and  Community  of  Interests  therein,  their  Rates,  Facilities, 
and  Practises.     Interstate  Commerce  Commission.  1907. 


50 


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RAILROADS  IN  THEIR  CORPORATE  RELATIONS       51 


on  that  date,  amounting  to  nearly  $9,000,000,000,  over 
$4,000,000,000,  or  46  per  cent.,  was  held  by  railroad  cor- 
porations; and  that,  out  of  $9,000,000,000  of  funded  debt, 
$1,440,000,000,  or  a  little  over  15  per  cent.,  was  held  by 
railroads. 

This  striking  contrast  between  the  percentage  of  funded 
debt  and  of  stock  held  by  railroads  leads  to  the  inevitable 
conclusion  that  railroads  in  their  purchase  of  railroad  se- 
curities are  not  primarily  seeking  investments,  but  that  the 
main  consideration  is  the  strategic  advantage  to  be  derived 
from  the  possession  of  voting  stock.  The  enormous  inter- 
corporate holdings  of  railroad  securities  also  warn  the 
student  of  railroad  finance  that  a  considerable  duplication 
of  securities  must  be  eliminated  before  the  net  amount 
in  the  hands  of  the  public  upon  which  railroads  are  en- 
titled to  earn  can  be  determined.  This  net  amount  as 
shown  in  the  1906  investigation  was  $7,840,000,000  of 
funded  debt  and  $4,740,000,000  of  stock,  or  $36,173  per 
mile  of  funded  debt  and  $21,877  of  stock.  It  is  probable 
that  this  net  amount  will  be  further  reduced  by  a  later 
and  still  more  exhaustive  investigation. 

We  turn  finally  to  a  consideration  of  the  most  interesting 
phase  of  the  intercorporate  relationship  problem, — the 
position  and  character  of  the  "holding  company."  This 
"holding"  function  is  not  confined  to  corporations  ex- 
pressly organized  for  the  purpose.  Almost  every  large 
operating  railroad  company  acts  to  some  extent  at  some 
time  as  a  '^holding  company"  for  financial  interests  that 
direct  the  system  to  which  it  belongs.  Occasionally  this 
is  true  to  a  very  considerable  degree,  as  in  the  case  of  the 
Oregon  Short  Line  already  described.  Trust  companies 
also  have  in  recent  years  often  acted  in  this  capacity. 
For  example,  the  stock  of  a  large  number  of  railroad  cor- 
porations comprising  the  Reading  system  was  in  1906  held 


by  the  Central  Trust  Company  of  New  York  as  trustee  for 
the  Reading  Company.  Sometimes  this  holding  function 
is  performed  by  an  individual  who,  in  his  capacity  as 
president  or  other  officer  of  a  railroad  company,  holds  for 
that  company  the  stock  of  another  railroad  corporation. 
Whatever  the  motive  may  be  for  this  general  policy,  it 
increases  the  government's  difficulty  in  securing  full  infor- 
mation as  to  intercorporate  alliances.  The  corporation 
whose  stock  is  held  may  reasonably  insist  that  its  informa- 
tion concerning  its  stockholders  does  not  extend  beyond 
its  stock  books,  and  moreover  it  is  at  least  questionable 
whether  the  Commission  has  jurisdiction  over  trust  com- 
panies or  over  individual  trustees  who  appear  to  be  hold- 
ing stock  in  their  individual  capacity.  The  advantage  of 
such  a  policy  to  a  railroad  that  desires  to  conceal  its 
control  of  another  railroad  is  obvious.  Such  concealment 
may  be  promoted,  however,  with  a  view  to  deceiving 
business  rivals  and  competitive  financial  interests  rather 
than  government  authority.  Hostihty  to  government 
interference  in  matters  of  this  kind  is  based  much  less  on 
a  fear  of  prosecution  for  violations  of  law  than  on  the  pos- 
sible effect  of  pubficity  upon  the  strategic  position  of  the 
corporation  among  its  rivals. 

But  beyond  this  comparatively  simple  method  of  holding 
corporate  securities  there  is  the  "holding  company"  char- 
tered expressly  for  the  purpose  of  performing  this  function 
and  given  by  the  law  of  the  State,  usually  New  Jersey,  the 
power  to  purchase,  hold,  and  sell  securities  and  to  issue 
its  own  obligations  in  return  therefor.  Such  corporations 
have  assumed  many  different  forms  and  have  been  assigned 
the  performance  of  varied  services,  but  in  principle  they 
do  not  differ.  Their  variations  depend  upon  their  differ- 
ences in  location  in  the  railroad  system  of  which  they 
are  a  part  and  the  diversity  in  the  character  of  the  securi- 
ties held  by  them. 


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Thus  there  are  the  holding  companies  that  are  at  the 
head  of  railroad  systems  and  that  bind  together  the 
different  operating  railroad  lines  under  the  control  of  a 
single  financial  interest/  Then  there  are  the  intermediate 
holding  companies  that  hold  securities  in  the  interest  of 
the  railroad  corporation  or  corporations  by  which  they 
are  controlled.  These  companies  in  turn  may  be  either 
purely  railroad  holding  companies  organized  specifically 
for  the  purpose  of  holding  the  stock  of  one  or  more  rail- 
road corporations,  or  they  may  be  the  safety  deposit  for 
a  mass  of  miscellaneous  securities  that  the  railroad  does 
not  desire  to  carry  on  its  own  books. 

A  few  examples  will  make  the  point  of  this  discussion 
clear.  The  Michigan  Securities  Company  with  a  capital 
stock  of  only  $20,000,  all  of  which  is  owned  by  the  Cin- 
cinnati, Hamilton  &  Dayton,  is  the  agency  through  which 
the  latter  corporation  held  on  June  30,  1907,  among 
other  securities,  $11,000,000  of  the  capital  stock  of  the  Pere 
Marquette  and  $750,000  of  the  stock  of  the  Southwestern 
Construction  Company.  The  Illinois  Central  has  within 
its  system  two  holding  companies  of  this  character,  of 
which  it  owns  the  entire  capital  stock.  One,  the  Mississippi 
Valley  Company,  has  a  capital  stock  of  $300,000  and  con- 
trols four  railroad  corporations,  including  the  Yazoo  & 
Mississippi  Valley  with  over  1,200  miles  of  line,  and  a  cap- 
italization of  $6,000,000  of  stock  and  $53,000,000  of 
funded  debt.  The  other,  the  Mississippi  Valley  Corpora- 
tion, has  a  capital  stock  of  $5,000  and  a  funded  debt  of 
nearly  $8,000,000,  and  controls  solely  and  jointly  ten 
terminal,  bridge,  depot,  elevator,  and  small  railroad  com- 
panies, with  an  aggregate  capitahzation  of  $17,000,000, 
besides  owning  securities  in  a  number  of  other  companies. 
The  Union  Pacific  owns  95  per  cent,  of  the  stock  of  the 

'  Such  holding  companies  should  not  be  confused  with  corporations  like  the 
Southern  Pacific  Company  and  the  Pennsylvania  Company,  which  own  no  mileage, 
but  which  operate  railroad  systems. 


RAILROADS  IN  THEIR  CORPORATE  RELATIONS       53 

Railroad  Securities  Company.  The  latter  has  purchased 
$8,000,000  of  Illinois  Central  stock,  and  has  pledged  this 
as  collateral  for  the  issue  of  an  equivalent  amount  of 
bonds.  Its  authorized  issue  of  bonds  is  $20,000,000,  but 
the  unissued  $12,000,000  can  only  be  put  out  against  the 
deposit  of  an  equal  amount  of  Illinois  Central  stock  in 
addition  to  that  already  in  the  hands  of  the  trustee.  The 
Southwestern  Construction  Company,  which  owns  68  per 
cent,  of  the  capital  stock  of  the  Cincinnati,  New  Orleans 
&  Texas  Pacific,  is  similar  in  character  to  those  already 
described,  except  that  it  is  controlled  jointly  by  two  rail- 
road corporations,  the  Southern  and  the  Cincinnati,  Hamil- 
ton &  Dayton. 

The  Pennsylvania  Company,  altho  not  identical  in 
character  with  the  corporations  already  mentioned,  may 
roughly  be  classified  with  this  group.  Its  capital  stock  of 
$60,000,000  is  all  owned  by  the  Pennsylvania  Railroad  Com- 
pany. On  June  30,  1907,  it  owned  no  mileage,  but  op- 
erated 1,413  miles  of  road  west  of  Pittsburg.  It  owned 
over  $138,000,000  of  railroad  stock  and  $95,000,000  of 
bonds.  A  large  proportion  of  its  holdings  were  pledged 
for  the  issue  of  collateral  trust  bonds,  which  form  a  large 
majority  of  its  funded  debt.  That  it  has  been  used  by  the 
Pennsylvania  Railroad  Company  as  a  holding  company 
has  been  shown  earlier  in  discussing  the  sale  of  Baltimore 
&  Ohio  stock.  That  it  is  also  used  as  a  medium  for  the 
issue  of  new  obligations  may  be  learned  from  the  state- 
ment of  officers  of  the  Pennsylvania  Railroad  Company, 
who  in  reply  to  inquiries  have  said : — 

In  regard  to  the  issues  of  the  Pennsylvania  Company  obligations, 
the  Pennsylvania  Company  is  simply  a  bureau  of  the  Pennsylvania 
Railroad  Company,  which  owns  every  share  of  its  capital  stock; 
and  for  the  same  reason  that  the  Pennsylvania  Railroad  Company 
takes  charge  of  the  issue  of  the  car  trust  certificates  to  cover  addi- 
tional equipment  furnished  to  all  its  lines  both  East  and  West  of 


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I      ( 


!m 


I    :;i: 


Pittsburg,  it  feels  itself  entirely  at  liberty  when  short  term  secu- 
rities have  to  be  issued  to  use  the  Pennsylvania  Company  for  that 
purpose,  or  to  use  the  Pennsylvania  Railroad  Company  as  it 
may  prefer.  .  .  . 

.  .  .  One  of  the  objects  in  view  when  the  Pennsylvania  Company 
was  organized  was  to  enable  it  to  do  just  the  things  for  which  the 
Pennsylvania  Railroad  Company  is  now  using  it;  and  in  granting 
its  charter  the  State  gave  it  certain  exceptional  privileges  which 
are  not  possessed  by  the  Pennsylvania  Railroad  Company  under 
its  charter.  It  is,  therefore,  of  special  value  to  the  Pennsylvania 
Railroad  Company  for  this  reason,  and,  as  the  reports  of  the  two 
companies  state  these  transactions  very  clearly,  it  is  not  thought 
that  any  obscurity  or  misapprehension  can  exist  in  reference 
thereto.^ 

Similar  in  character  and  purpose  to  the  instances 
akeady  noted  are  many  of  the  so-called  development, 
improvement,  investment,  and  land  companies.  Nearly 
every  raihoad  corporation  of  any  size  has  organized 
and  owns  the  stock  of  companies  whose  purpose  is  to 
purchase  and  sell  real  estate  and  other  miscellaneous 
properties.  It  was  formerly  the  practise  for  this  function 
to  be  performed  by  an  individual,  but  the  complications 
and  delays  that  arose  in  the  transfer  of  title  upon  the 
death  of  any  such  trustee  led  to  the  substitution  of  corpora- 
tions. In  a  considerable  number  of  cases  these  companies 
have  also  been  used  as  holding  companies  for  securities 
of  subsidiary  railroads.  For  example,  the  Erie  Land  and 
Improvement  Company,  the  entire  capital  stock  of  which 
is  owned  by  the  Erie  Railroad,  owns  the  entire  capital 
stock  of  the  Southern  Tier  Development  Company,  which 
in  turn  owns  stock  in  one  steam  railroad,  two  electric 
railways,  and  a  lake  line.  The  Santa  F6  Land  Improve- 
ment Company,  whose  stock  is  all  in  the  possession  of  the 
Atchison,  Topeka  &  Santa  F^  Railway  Company,  owns 
$309,900  of  the  capital  stock  of  the   CaUfornia-Nevada 

1  Snyder,  American  Railways  as  Investments,  p.  554. 


RAILROADS  IN  THEIR  CORPORATE  RELATIONS      55 

Railroad  Company.  But  the  most  important  illustration 
of  this  form  of  holding  company  is  the  Northwestern 
Improvement  Company,  owned  entire  by  the  Northern 
Pacific  Railway.  This  company  owns  securities  of  steam 
raihoads,  terminal,  navigation,  irrigation,  express,  land, 
and  mining  companies  amounting  to  over  $27,500,000. 

A  most  interesting  example  of  the  extent  to  which  this 
holding  company  principle  may  be  carried  is  that  of  the 
Lake  Superior  Company,  Limited,  an  agency  of  the  Great 
Northern  Railway  Company.  No  official  information  is 
available,  but  it  appears  from  the  discussion  in  finan- 
cial journals  that  this  company  is  a  limited  copartner- 
ship, organized  in  1899  under  the  laws  of  Michigan  with 
a  nominal  capital  of  $100,000.  It  has  three  stockholders, 
James  J.  Hill,  Louis  W.  Hill,  and  Robert  I.  Farrington, 
all  officers  of  the  Great  Northern  Railway  Company. 
By  a  deed  of  trust,  the  Great  Northern  transferred  to  the 
Lake  Superior  Company,  Limited,  securities  to  a  total 
par  value  of  over  $8,000,000,  including  stocks  and  bonds 
of  raihoad,  terminal,  express,  elevator,  land,  water-power, 
bridge,  and  mining  companies.  This  partnership  has  since 
been  used  as  a  means  of  acquiring  real  estate,  lumber,  and 
ore  lands,  the  earnings  of  its  investments  being  largely 
reinvested  instead  of  being  distributed  as  dividends.* 
Of  all  these  interesting  transactions  not  a  trace  appears 
in  the  annual  report  of  the  Great  Northern  Railway 
Company  to  the  Interstate  Commerce  Commission,  nor 
even  in  its  report  to  its  own  stockholders,  except  for  the 
announcement  in  the  report  for  1900  of  the  organization 
of  the  company. 

As  a  rule,  the  relation  between  the  holding  company 
and  the  railroad  is  a  simple  one  and  can  readily  be  traced 
and    understood,    but    occasionally    the    entanglements 

iThe  ore  lands  acquired  have  since  been  transferred  to  trustees  to  be  held 
and  managed  by  them  for  the  benefit  of  the  holders  of  Great  Northern  ore  cer- 
tificates. 


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■i  I  H 


Ml 

!         111! 


of  the  intercorporate  relationship  are  so  extensive  that 
legal  counsel  and  the  courts  have  had  difl&culty  in  fol- 
lowing their  ramifications.  Nothing  short  of  a  drastic 
reorganization  would  in  many  cases  be  sufficient  to  dis- 
entangle the  maze  and  reduce  the  relationship  to  one  of 
simpUcity. 

The  Intercorporate  Relationship  Report  of  the  Inter- 
state Commerce  Commission  contains  a  diagram  of  the 
relations  of  railroads  comprising  the  Queen  &  Crescent 
route,  which  well  illustrates  the  point.  The  Southwest- 
ern Construction  Company,  itself  a  holding  company  for 
the  Cincinnati,  New  Orleans  &  Texas  Pacific,  is  owned 
by  the  Southern,  by  the  Cincinnati,  Hamilton  &  Dayton 
through  the  Michigan  Securities  Company,  a  holding 
company,  and  by  the  Alabama,  New  Orleans,  Texas  & 
Pacific  Junction  Railways  Company,  Limited,  another 
holding  company,  the  latter  being  largely  controlled 
by  railroads  subsidiary  to  those  already  mentioned, 
through  the  possession  of  a  one-fourth  undivided  interest 
in  its  stock. 

Another  instance  is  that  of  the  New  York,  New  Haven 
&  Hartford,  which  was  merged  in  1907  with  the  Consoh- 
dated  Railway  Company.  The  Consohdated  Railway 
Company  represented  in  the  first  place  the  consoUdation 
of  a  large  number  of  electric  railway  companies  within  the 
State  of  Connecticut.  In  addition,  it  had  vested  in  it 
the  control  of  the  New  England  Investment  and  Security 
Company,  a  voluntary  association  organized  to  hold  the 
stocks  of  the  various  traction  properties  owned  by  the 
New  Haven  within  the  State  of  Massachusetts.^  Again, 
the  Consohdated  Railway  Company  acquired  control  of 
the  Rhode  Island  Securities  Company,  which  was  the  sole 
owner  of  the  stock  of  the  Rhode  Island  Company,  the 

1  This  device  was  in  May,  1908,  declared  unlawful  by  the  Supreme  Court  of 
Massachusetts. 


RAILROADS  IN  THEIR  CORPORATE  RELATIONS      57 

latter  controlhng  through  lease  electric  railway,  electric 
hght,  and  gas  companies  in  Providence  and  vicinity. 
Finally,  the  Providence  Securities  Company  was  organized 
for  the  purpose  of  financing  the  acquisition  of  the  securi- 
ties of  the  Rhode  Island  Securities  Company,  and  the 
stock  of  the  Providence  Company  is  all  owned  by  the 
New  Haven.  Even  without  these  holding  companies 
heaped  one  upon  another,  the  New  Haven  system  would 
have  been  sufficiently  comphcated,  for  it  is  made  up  of 
merged  lines  whose  obUgations  have  been  assumed;  of 
roads  controlled  through  stock  ownership,  some  operated 
independently,  some  by  New  Haven  management;  of 
leased  roads;  and  of  roads  whose  lease  contract  has  been 
assumed  in  connection  with  the  lease  or  control  of  its 
lessee.  But  the  extensive  venture  of  this  corporation 
into  electric  railway  ownership  and  operation  has  been 
accompanied  by  a  further  tangle  of  intercorporate  alh- 
ances  that  is  difficult  to  justify.  In  many  cases  such  a 
confused  situation  as  this  has  doubtless  grown  up  gradu- 
ally, and  the  diflaculties,  legal  and  otherwise,  of  getting 
rid  of  it  are  greater  than  those  of  maintaming  the  existing 
status.  But,  notwithstanding  all  this,  it  must  be  evident 
to  any  one  who  gives  the  matter  close  study  that  compU- 
cations  such  as  these  are  frequently  looked  upon  with 
favor  because  they  give  opportunity  for  inflated  stock 
issues  and  market  manipulation,  for  an  interminghng  of 
interests  that  will  confuse  the  pubhc  and  hamper  regulating 
bodies,  both  State  and  federal,  and  for  a  situation  that  will 
furnish  a  means  of  escape  to  important  transportation 
agencies  from  the  jurisdiction  of  State  and  interstate 
commissions. 

The  holding  company  frequently  performs  an  economic 
service  when  it  brings  small  scattered  corporations  to- 
gether as  a  preUminary  step  to  consoUdation,  or  when 
it  is  used  as  a  convenient  device  for  joint  control  by  two 


'i 


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ni 


''' 


or  more  railroad  corporations  of  some  railroad  property 
in  which  they  have  a  legitimate  joint  interest,  provided 
of  course  that  the  financial  transactions  of  such  a  holding 
company  are  made  as  pubUc  as  those  of  the  railroad  cor- 
porations that  own  it.  But,  when  it  is  a  scheme  dehb- 
erately  invented  for  the  purpose  of  avoiding  pubUcity 
and  inspection  and  as  a  means  of  carrying  on  business 
not  permitted  by  its  charter,  its  continuance  becomes 
a  pubhc  menace.  In  such  cases  the  books  of  the  holding 
company  are  frequently  kept  by  separate  officers  inde- 
pendent of  the  railroad  accounting  officials,  and  the  rail- 
road is  able  to  report  that  it  is  not  officially  informed  of 
the  financial  transactions  of  the  holding  company  whose 
stock  it  owns.  Thus  the  Great  Northern  Railway  Com- 
pany reports  to  the  Interstate  Commerce  Commission 
that  its  interest  in  the  Duluth,  Superior  &  Western  Ter- 
minal Company  is  merely  that  of  a  lessee  of  a  portion  of 
its  property,  altho  it  appears  that  the  Lake  Superior 
Company,  Limited,  owns  $1,999,500  of  its  stock  out  of 
a  total  outstanding  of  $2,000,000.  Thus  is  the  Yazoo  & 
Mississippi  Valley  able  to  state  under  oath  to  the  Com- 
mission that  it  is  not  controlled  by  any  other  railroad 
company,  altho  it  is  controlled  by  the  Mississippi  Valley 
Company,  whose  entire  capital  stock  is  owned  by  the 
IlUnois  Central. 

But  the  holding  companies  that  are  of  the  greatest 
interest  to  the  pubhc  are  those  at  the  head  of  great  rail- 
road systems.  Three  illustrations  will  suffice  to  describe 
this  class,  the  Atlantic  Coast  Line  Company,  the  Reading 
Company,  and  the  Rock  Island  Company.  The  unique 
feature  of  the  Atlantic  Coast  Line  Company  is  its  small 
capitahzation  in  comparison  with  the  securities  it  holds. 
This  company  was  organized  in  1889  to  bring  under 
unified  control  the  group  of  railways  later  consoUdated 
into  the  Atlantic  Coast  Line  Railroad  Company.     It  had 


•rsasam 


RAILROADS  IN  THEIR  CORPORATE  RELATIONS       59 

a  capital  stock  of  $10,000,000,  which  in  1897  was  reduced 
to  $5,000,000  by  the  issue  of  certificates  of  indebtedness 
in  place  of  the  stock  retired.  The  next  year  the  stock 
was  restored  to  its  original  amount  of  $10,000,000  by  a 
stock  dividend  of  100  per  cent.,  representing  accumu- 
lated surplus.  On  June  30,  1907,  this  company  had 
outstanding  $12,600,000  of  stock  and  $13,000,000  of 
certificates  of  indebtedness.  It  owned  $25,266,300  out 
of  $50,134,200,  or  a  httle  over  50  per  cent,  of  the  stock 
of  the  Atlantic  Coast  Line  Raihoad  Company  and 
$11,500,000  of  its  funded  debt,  the  latter  being  pledged 
for  a  portion  of  its  own  certificates  of  indebtedness. 
When  it  is  recalled  that  the  Atlantic  Coast  Line  Railroad 
Company  in  turn  holds  51  per  cent,  of  the  stock  of  the 
Louisville  &  Nashville  Railroad  Company,  and  that 
this  latter  corporation  owns  jointly  with  the  Southern 
Railway  88  per  cent,  of  the  stock  of  the  Chicago,  Indianapo- 
lis &  Louisville,  and  is  a  joint  lessee  with  the  Atlantic 
Coast  Line  Railroad  Company  of  the  Georgia  Railroad, 
it  will  be  seen  that  less  than  $6,500,000  of  Atlantic  Coast 
Line  Company  stock,  constituting  a  majority,  controls 
solely  and  jointly  a  railroad  system  11,000  miles  in  extent 
with  a  total  capitahzation  of  over  $725,000,000.  No 
similar  instance  can  be  discovered  of  such  wide-reaching 
control  on  the  basis  of  so  small  a  capital. 

The  pecuharity  of  the  Reading  Company  is  that  it 
imites  under  one  management  railroad  and  mining  prop- 
erties. This  company  has  a  capital  stock  of  $140,000,000 
and  funded  debt  of  nearly  $105,000,000.  It  owns  all  the 
stock  and  a  portion  of  the  funded  debt  of  the  Phila- 
delphia &  Reading  Railway  Company,  all  the  stock  of 
the  Philadelphia  &  Reading  Coal  and  Iron  Company,  and 
53  per  cent,  of  the  stock  of  the  Central  Railroad  of  New 
Jersey.  In  addition  it  owns  about  $20,000,000  of  bonds 
and   $35,000,000  of   stock  in   sundry  other   companies, 


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including  steam  and  electric  railways,  dock,  terminal, 
navigation,  ferry,  bridge,  mining,  telegraph,  real  estate, 
and  hotel  companies,  and  stock  exchanges.  In  this  Ust 
is  included  the  stock  of  nearly  all  the  roads  comprising 
the  Philadelphia  &  Reading  Railway  system,  these  roads 
being  operated  by  the  latter  under  lease.  Even  the  rail- 
road and  marine  equipment  used  in  operation  is  leased 
from  the  Reading  Company. 

The  Rock  Island  was  chartered  in  1902,  with  the  State 
of  New  Jersey  as  its  gracious  god-father.     It  has  $139,- 
000,000  of  capital  stock  and  no  debt.    This  company 
owns  the  entire  stock  issue  of  the  Chicago,  Rock  Island 
&  Pacific  Railroad  Company,  which  was  chartered  in  Iowa 
as  an  operating  railroad,  but  which  neither  owns  nor  oper- 
ates mileage  and  is  simply  a  holding  device  for  the  con- 
venient use  of  Rock  Island  financiers.    This  latter  corpora- 
tion in  turn  owns  93  per  cent,  of  the  stock  of  the  Chicago, 
Rock  Island  &  Pacific  Railway  Company — the  principal 
operating  company  of  the  Rock  Island  system — and  58 
per  cent,  of  the  stock  of  the  St.  Louis  &  San  Francisco 
Railroad  Company.    The  Chicago,  Rock  Island  &  Pacific 
Railway  owns  half  the  stock  of  the  Alton,  and  the  St. 
Louis  &  San  Francisco  controls  the  Chicago  &  Eastern 
Illinois,  which  in  turn  controls  the  Evansville  &  Terre 
Haute.    Two  more  facts  are  necessary  to  make  clear  the 
underlying   purpose    of   this    gigantic    structure.    First, 
holders  of  the  preferred  stock  of  the  Rock  Island  Com- 
pany have  the  right,  to  the  exclusion  of  holders  of  the 
common  stock,  to  elect  a  majority  of  the  board  of  direc- 
tors, such  right  to  be  surrendered  only  with  the  consent 
of  two-thirds  of  the  preferred  stockholders.    And,  second, 
the  amount  of  the  preferred  stock  cannot  be  increased 
except  upon  the  affirmative  vote  of  two-thirds  of  the  entire 
preferred  and  two-thirds  of  the  entire  common  stock.     In 
other  words,  holders  of  a  majority  of  the  preferred  stock, 


RAILROADS  IN  THEIR  CORPORATE  RELATIONS      61 

or  one  share  over  $27,000,000,  have  permanently  intrenched 
themselves  in  control  of  a  raihoad  system  of  15,000  miles 
with  total  outstanding  capitaUzation,  stock  and  funded 
debt,  of  $1,500,000,000,  and  they  have  issued  $380,000,000 
of  holding  company  securities  in  the  prosecution  of  their 
plans  .^ 

That  such  an  inflation  of  securities  as  is  found  in  the 
case  of  the  Rock  Island  and  other  holding  companies  is 
a  pubhc  danger  cannot  be  questioned,  but  that  it  results 
in  a  demand  for  higher  rates  in  order  to  pay  dividends 
on  such  securities  is  a  charge  that  can  hardly  be  sus- 
tained. The  pure  holding  companies  derive  their  income 
solely  from  the  securities  they  hold,  and  demand  no 
direct  contribution  from  the  pubhc.  Furthermore,  so 
far  as  the  actual  amount  of  railroad  securities  outstand- 
ing in  the  hands  of  the  pubhc  is  concerned,  the  total  is 
not  as  a  rule  greatly  increased  by  the  presence  of  the 
holding  company,  for  the  par  value  of  holding  company 
capitalization  is  in  most  cases  less  than  the  par  value  of 
the  securities  which  it  holds  and  upon  which  its  own  capital 
is  supported.*  To  be  sure,  in  the  Rock  Island  Company 
case  the  total  amount  of  securities  in  the  hands  of  the 
pubhc  has  been  increased  beyond  the  amount  that  would 
have  been  in  existence,  had  the  raihoad  corporations  been 
left  undisturbed.  But  this  is  an  exceptional  instance,  and 
there  are  here  two  holding  companies  in  action  instead  of 
one.  Justification  for  pubhc  alarm  over  inflated  capitah- 
zation,  so  far  as  such  increase  in  securities  affects  rates, 
should  arise  not  from  the  attitude  of  the  holding  company, 

*  A  striking  example  of  holding  company  finance  in  the  municipal  field  is  that  of 
the  Interborough  Metropolitan  Company,  which,  through  ownership  of  the  Inter- 
borough  Rapid  Transit  Company,  the  Metropolitan  Securities  Company,  and  the 
Metropolitan  Street  Railway  Company,  is  in  control  of  the  entire  local  transpjortation 
situation  in  New  York  City. 

'This  discussion  is  limited  to  railroad-holding  companies.  The  statements 
made  concerning  the  apparent  lack  of  inflation  of  securities  would  be  modified  con- 
aiderably,  were  holding  companies  in  general  under  consideration. 


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but  rather  from  that  of  the  operating  raihoad  corporation, 
which  is  itself  the  holder  of  the  securities  of  another  rail- 
road. Such  a  company  frequently  contends  for  rates 
adequate  to  pay  a  ''reasonable  return"  upon  its  entire 
capitalization  when  a  portion  of  that  capital  was  issued 
to  cover  the  acquisition  of  securities  of  other  roads.  From 
the  pubhc  can  fairly  come  only  the  earnings  necessary  to 
support  capital  that  covers  the  actual  property  of  the 
corporation  employed  in  transportation;  support  for  the 
remainder  of  its  capital  must  obviously  come  from  the 
securities  it  owns.  It  was  with  the  purpose  of  determin- 
ing the  amount  of  capital  that  represents  operating  railway 
property  and  of  ehminating  such  dupUcation  of  securities 
that  the  Commission's  Intercorporate  Relationship  in- 
vestigation was  undertaken.  It  was  found  that  out  of  a 
total  gross  outstanding  capitahzation,  funded  debt  and 
stock,  of  over  $18,000,000,000,  railroad  corporations  held 
$5,500,000,000,  leaving  $12,500,000,000  in  the  hands  of 
the  pubhc.  This  figure,  altho  subject  to  correction  in 
later  investigations,  is  the  one  that  should  be  accepted  as 
measuring  approximately  the  actual  value  of  railroad 
property. 

That  the  holding  company  does  influence  rates  to  some 
extent  is  true,  but  in  a  more  indirect  manner.  So  far  at 
least  as  the  large  holding  company  at  the  head  of  a  system 
is  concerned,  its  profitable  Hfe  depends  upon  the  income 
that  it  derives  from  the  securities  in  its  treasury.  It  is, 
therefore,  of  vital  consequence  to  the  financial  interests 
in  command  that  the  railroads  controlled  shall  declare  a 
continuous  dividend.  This  may  necessitate  the  main- 
tenance or  even  an  increase  of  rates  that  seems  unwar- 
ranted from  the  shipper's  standpoint.  However,  the 
insistence  upon  dividend  payments  is  more  likely  to  affect 
the  road's  physical  condition  by  preventing  adequate 
charges  to  maintenance  and  depreciation,   and  in  this 


,\ 


RAILROADS  IN  THEIR  CORPORATE  RELATIONS      63 

respect  it  menaces  the  investor  quite  as  much  as  it  does 
the  shipping  pubhc. 

Pubhc   opposition  to  the  holding  company  has  two 
explanations.    In  the  first  place,  the  device  makes  possi- 
ble the  concentration  of  interests  of  large  pubhc  impor- 
tance in  a  few  hands.    This  seems  to  be  the  principal  reason 
for  its  creation,  at  least  so  far  as  the  holding  company  at 
the  head  of  a  system  is  concerned.    It  has  the  same  ad- 
vantage that  a  voting  trust  agreement  possesses— but  in 
permanent  form— of  perpetuating  the  control  of  a  finan- 
cial group  whose  holdings  might  otherwise  become  scat- 
tered.   It  is  evident  that,  if  the  majority  of  the  stock 
of  a  raih-oad  company  is  owned  by  a  holding  company 
which  votes  it  in  a  block,  then  a  majority  of  the  holding 
company's  stock,  which  on  a  basis  of  par  for  par  is  only 
26  per  cent,  of  the  raihoad's  capital,  is  sufficient  to  control 
the  situation.    The  Rock  Island  Company  is  a  striking 
case  in  point.    The   ill-fated  Northern   Securities   Com- 
pany was  not  different  in  principle,  but  it  had  the  mis- 
fortune to  hold  the  securities  of  parallel  and  competing 
roads.    If  the  financial  group  in  control  has  primarily 
at  heart  the  transportation  interests  of  its  properties,  such 
an  organization  need  not  injure  the  pubhc.     But  the  danger 
to  both  pubhc  and  investor  in  railroad  securities  hes  in 
the  fact  that  such  groups  of  financiers  are  too  frequently 
interested  in  speculative  finance  rather  than  in  raihoading. 
There  are  present  in  such  a  situation  conditions  that 
amply  justify  pubhc  alarm. 

The  second  cause  for  opposition  to  the  holding  com- 
pany hes  in  the  fact  that  it  is  not  apparently  subject  to 
the  regulation  of  the  Interstate  Commerce  Commission. 
At  least,  it  has  not  recognized  such  jurisdiction,  and  the 
question  has  not  as  yet  been  submitied  to  judicial  deter- 
mination. This  makes  it  possible  for  a  railroad  corpora- 
tion or  a  group  of  financial  interests  to  refuse  all  informa- 


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tion  concerning  the  holding  company  which  it   controls, 
and  under  cover  of  such  immunity  from  pubUc  inspection 
to  carry  out  policies  that  might  otherwise  be  difficult  or 
impossible.    A  railroad  may,  through  the  medium  of  a 
holding  company,  conceal  its  control  of  another  railroad 
corporation.    It  may  by  the  same  means  engage  indirectly 
in  businesses,  such  as  mining,  that  are  forbidden  by  its 
own  charter.    It  may  evade  specific  provisions  of  statutes 
or  administrative  orders  of  a  regulating  body.    For   ex- 
ample, the  Reading  Company,  which  owns  both  the  Phila- 
delphia &   Reading    Coal    and    Iron  Company  and  the 
Philadelphia  &  Reading  Railway,  denies  the  jurisdiction 
of  the  Interstate  Commerce  Commission,  and  does   not 
consider  itself  subject  to  the  provision  of  the  Hepburn  Act 
which  forbids  railroads  to  transport,  except  for  their  own 
use,  products  which  they  own  or  which  they  have  manu- 
factured,   mined,    or    produced.^    Again,    an  accounting 
order  of  the  Commission  requires  railroads  to  charge 
against  operating  expenses  an  amount  adequate  to  cover 
depreciation    of    equipment.     If    the    holding    company 
owns  the  equipment  and  leases  it  to  the  railroad  with  no 
provision  in  the  lease  that  such  equipment  shall  be  kept 
unimpaired,  and,  if  the  holding  company  is  not  subject  to 
the  jurisdiction  of  the  Commission,  the    administrative 
order  is  nullified. 

In  these  campaign  days,  when  specifics  are  daily  offered 
for  all  forms  of  economic  disease,  it  is  a  wise  conservatism 
that  refrains  from  the  proposal  of  too  sure  a  remedy.  But 
this  study  of  the  relations  of  railroad  corporations  to  one 
another  would  suggest  three  lines  of  approach  toward  the 
removal  of  such  evils  as  the  situation  has  brought  upon  us, 
and  they  will  be  stated  without  discussion  in  this  conclud- 

*The  "commodity  clause"  has  been  declared  unconstitutional  by  the  United 
States  Circuit  Court  of  Appeals,  but  has  not  yet  been  passed  upon  by  the  Supreme 
Court. 


I 

« 


RAILROADS  IN  THEIR  CORPORATE  RELATIONS      65 

ing  paragraph.  They  carry  with  them  legal  and  possibly 
constitutional  difficulties,  the  discussion  of  which,  however, 
is  outside  the  purpose  of  this  paper.  One  is  a  law  which 
would  bring  this  increasingly  popular  device— the  holding 
company— clearly  and  unequivocally  under  government 
jurisdiction,  and  compel  from  it  that  same  publicity  of 
accounting  to  which  the  railroad  corporations  are  subject. 
The  second  would  require  government  approval  for  aU 
new  issues  of  capital,  and  would  define  broadly  what 
constitutes  a  legitimate  basis  for  capitaHzation.  The 
third  would  confine  railroad  corporations  strictly  to  the 
business  of  transportation.  A  step  will  have  been  taken 
in  this  direction  if  the  commodity  clause  of  the  Hepburn 
Act  is  finally  sustained  by  the  courts.  The  next  step  will 
be  the  prohibition  of  the  exercise  by  raih-oads  of  the  hold- 
ing company  function,  and  a  confining  of  their  ownership 
of  securities  of  other  railroad  corporations  to  such  as  is 
necessary  in  the  conduct  of  a  legitimate  transportation 

business. 

Frank  Haigh  Dixon. 

Dartmouth  College. 


' 


•>       § 


I 


r 


GAYLAMOUNT 
PAMPHLET  BINDER 

Mmmm/aehmd  hy 

leAYLORD  BROS.  Inc. 

Syracu»««  N.  Y. 

Stecklen,  CaM. 


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